December 2010

Introduction

Season's greetings and welcome to our December Construction review. In this edition we consider cases concerning the legal responsibilities of:

. sub-contractors (and others) to subsequent occupiers; . quantity surveyors when valuing works; and . designers when relying on specialists.

We also highlight the principal changes made by the RIBA in its 2010 suite of contracts and look at a potential method of dealing with an unfavourable adjudication decision.

Contacts

If you have any queries regarding the matters raised in this e-bulletin please contact:

Guy Lane Peter Stockill Partner, BLM London Associate, BLM London [email protected] [email protected]

Contents

Liability of sub-sub-contractors/consultants to tenants Scope of a quantity surveyor’s duties Consultant’s liability for specialist’s designs The RIBA suite of agreements 2010 Correcting fundamental mistakes made in adjudication

Liability of sub-sub-contractors/consultants to tenants

Linklaters Business Services v McAlpine Ltd & Others [2010] EWHC 2931 (TCC) involved a dispute concerning the insulation of chilled pipework for the refurbishment of office premises at 1 Silk Street, London.

Linklaters became the tenant immediately upon completion of the refurbishment. The developer had employed McAlpine, as main contractor and McAlpine employed How Engineering Services as M&E sub-contractor.

How employed Southern Insulation (Medway) Ltd to supply and install thermal insulation for the chilled water pipework serving the air conditioning system.

1 Almost 10 years after practical completion a leak occurred from one of the chilled water riser pipes in the premises which led to the discovery of widespread corrosion. This in turn led Linklaters, on advice, to replace the corroded pipework throughout the buildings. In March 2007, Linklaters informed McAlpine and How of the leaks and its intention to pursue a claim against them on the grounds that the pipework had been inadequately insulated. Court proceedings were later issued against McAlpine and How, and How made a claim against Southern.

Linklaters succeeded in its claims against McAlpine and How. The issues arising in those claims are largely unremarkable, although one point to note is that the Employer’s Requirements stated that ‘first class workmanship’ was required. The judge held that this necessarily involves providing a quality of workmanship which is above the ordinary. The implications of agreeing to such an elevated standard of workmanship (rather than the usual obligation to carry out the works in a good and workmanlike manner or as a competent contractor) need to be fully considered when agreeing the terms of engagement.

The claims against Southern gave rise to the most interesting issues, albeit that the judge held that Southern had not been negligent, so his comments on most of these are persuasive but not binding authority.

1 The judge found that Linklaters had sufficient interest in the pipework to bring a claim in tort, even though the pipepwork was not within Linklaters’s leased area, because Linklaters was obliged to keep the pipework in good and substantial repair and to renew it as necessary.

2 The judge considered the argument put forward by Southern that the claim by How (pursuant to a duty of care in tort concurrent with its contractual duty) was time-barred, but decided it would not have been, despite the fact that the claim against Southern was presented some 13 years after completion of the works. The judge reasoned that How’s loss (which was financial loss directly flowing from defective work) only arose from the claim made against it by Linklaters and accordingly the earliest date at which the relevant loss can be said to have been incurred was the time when the claim was first intimated (March 2007). How would therefore have had six years from 2007 in which to bring a claim against Southern (subject to the statutory 15 year long-stop from the negligent act or omission).

3 Southern had previously applied to strike out How’s claim for contribution under the Civil Liability (Contribution) Act 1978 on the basis that no duty of care to Linklaters could arise in relation to (corrosion) damage to the pipework covered by any carelessly applied insulation as the pipework and the insulation was ‘the thing itself’. (It has been established law since 1932 and the House of Lords case of Donoghue v Stevenson – the snail in the bottle of ginger ale – that claimants can recover in tort for personal injury or damage to ‘other property’ flowing from the supply of defective goods but cannot recover for damage to the carelessly manufactured, designed or constructed ‘thing itself’ (so that Mrs Donoghue could recover damages for her personal injuries but could not recover the price paid for the ginger ale). Subsequent case law addresses the often difficult question of how this would be applied to a ‘complex structure’ such as a building and the matter was raised at a hearing in May 2010, but left open pending trial.

At trial, the judge considered previous judicial comments (mostly non-binding) giving examples of different elements of a finished ‘thing’ giving rise to recoverable damage to other elements, such as defective wiring causing fire damage to the rest of the building. He distinguished those examples by comparing this case to examples of faulty components within an installation (such as a faulty valve within a boiler) causing damage to that installation. He considered that the insulated chilled water pipework was essentially one thing for the purposes of tort as chilled water pipework could not function as such without insulation – the water would not stay chilled and the pipework would

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Comment

The brevity of the judge’s (non-binding) comments on limitation belie the difficulties in this area of the law and it remains to be seen whether they will be followed. If followed, they will substantially extend the potential period of time for which sub-contractors/consultants are on risk. In any event, his comments provide a reminder of the value of express limitation clauses, even in simple contracts, in order to restrict all liability, whether arising in contract or tort, to a specific time period.

Having, tantalisingly, left open questions surrounding the complex structure theory at a hearing in May, the judge’s ultimate decision accords with previous judicial opinion. There is no doubt an element of policy in his decision, in order not to ‘open the floodgates’ to claims for economic loss in tort. Parties in Linklaters’s position should suffer no injustice provided they obtain collateral warranties from the parties providing work or services on their premises and indeed Linklaters were successful in their claims against McAlpine and How for breach of their collateral warranties.

Zita Mansi Associate, BLM London

Scope of a quantity surveyor’s duties

Does a quantity surveyor owe its client a duty only to value work that is not obviously defective?

This was the issue in the recent case of Dhamija & Another v Sunningdale Joineries Limited & Others [2010] EWHC 2396, which concerned a dispute over defective work between a house owner and amongst others, a quantity surveyor, where there was no written or oral contract.

The client alleged that the quantity surveyor owed them a duty ‘to only value work that had been properly executed by the contractor and was not obviously defective’ and that this duty had been breached (listing hundreds of alleged defects). The quantity surveyor disagreed and applied to strike out the claim.

Sutcliffe v Chippendale & Edmonton (1971) 18 BLR 149 is the leading authority on the obligations owed by quantity surveyors in connection with defective work. In that case, the judge found that an architect was duty bound to notify the quantity surveyor of any work deemed not to be properly executed, in advance, in order to give the quantity surveyor an opportunity to exclude it.

A similar view was expressed in Jackson and Powell on Professional Liability: “where a quantity surveyor is also engaged by the employer, the architect should keep him continually informed of any defective or improperly executed work observed so as to give him the opportunity of excluding it from interim valuations”.

The judge relied on these sources in rejecting the argument that there was an implied term which meant that, if defective work was noticed by the quantity surveyor, he must bring it to the attention of the architect. Instead he found that there was an implied term that the quantity surveyor should act with the reasonable care and skill of quantity surveyors of ordinary experience and competence when valuing the works properly executed for the purpose of issuing interim certificates.

3 He considered that the client was attempting to turn the usual position on its head, by requiring the quantity surveyor to tell the architect about problematic work and to make the quantity surveyor liable for quality as well as quantities. This was inconsistent with wording on the quantity surveyor’s interim valuation, which stated that all issues of defective work were for the architect to address and in practice the architect had drawn items of defective work to the quantity surveyor’s attention.

The judge expressly rejected a passage in Hudson’s Building and Engineering Contracts which suggested that the quantity surveyor had a duty to inform the architect of defective work noticed during visits for the purpose of undertaking valuations, in case the architect has missed it. He also rejected the suggestion that an owner would have a right of action against a quantity surveyor who failed to raise glaring defects.

As a result the application was partly successful, but the claim continues in order to determine whether the quantity surveyor had acted with reasonable skill and care in valuing the works. Based on the evidence before him, the judge described this as an 'uphill task”.

Comment

This case supports the view that, subject to the terms of their appointments or any assumption of responsibility on the facts, there is a clear distinction between the roles of the architect (as to the quality of the work) and the quantity surveyor (as to assessing what is payable) when carrying out interim valuations. Nevertheless, a quantity surveyor who notices an obvious defect which appears to have been missed by the architect ought to bring it to the architect’s attention, noting that it is a matter for the architect to advise the owner whether it is defective or not but that it appears to have been overlooked.

It should also be recognised that if any construction professional becomes aware of defective work that could give rise to a health and safety risk, that they have an obligation to raise it immediately, even if it may be outside the scope of their appointment, to avoid the risk of personal injury or death.

Kayleigh Rhodes Trainee solicitor, BLM London

Consultant’s liability for specialist’s designs

Cooperative Group Ltd (CWS) v John Allen Associates Ltd (JAA) [2010] EWHC 2300 (TCC) concerned a failed ground improvement scheme. CWS engaged Cliveden Estates Ltd to construct a supermarket in Sandwich, Kent. Cliveden appointed JAA as civil and structural engineer, responsible for design of the foundations and superstructure. JAA provided a collateral warranty to CWS.

JAA’s design specified a ground bearing floor slab, rigidly pinned at the centre and around the perimeter to concrete piles, combined with vibro displacement ground improvement. JAA sought advice, albeit informally, from a specialist, Keller Ltd, who confirmed that vibro displacement was a viable option.

The design failed and the floor slab suffered significant differential settlement. CWS brought a claim against JAA on the basis that vibro displacement would never have worked at the site and was negligently proposed by JAA.

Principle question: Could vibro displacement have worked?

4 The judge concluded that, if it had been properly designed and carried out, vibro displacement would have been able to limit the overall long-term settlement, providing a suitable service gradient for the floor slab. Therefore CWS’s case failed.

Secondary question: Did JAA act reasonably in relying on advice from specialists?

The judge went on to consider whether JAA had discharged their duty to take reasonable care by relying on advice from Keller. The propositions drawn from the authorities were:

4 Construction professionals do not divest themselves of their duties merely by obtaining advice or a design from another party.

5 Their duty can, however, be discharged by relying on the advice or design of a specialist, provided that they act reasonably in doing so.

6 In determining whether construction professionals act reasonably in seeking the assistance of specialists to discharge their duty, the court has to consider all the circumstances which include:

a Whether the assistance is taken from an appropriate specialist.

b Whether it was reasonable to seek assistance from other professionals, research or other associations or sources.

c Whether there was information which should have led the professional to give a warning.

d Whether and to what extent the client might have a remedy in respect of the advice from the other specialist; and

e Whether the construction professional should have advised the client to seek advice elsewhere or should themselves have taken professional advice under a separate retainer.

The judge found that it was reasonable for JAA to rely on the advice of Keller, as a specialist contractor, even though it was informal and unpaid advice. He noted that it was not uncommon for geotechnical reports to refer consulting engineers to specialist contractors for technical advice on piling and ground treatment.

Further, the court found that there was no duty to undertake an independent evaluation of the risks of vibro displacement, even in the face of certain warnings. Nor was it necessary to advise the developer to seek their own professional advice.

JAA was also entitled to rely on the ground improvement design produced by the specialist sub- contractor that was ultimately engaged: Pennine Vibropiling Ltd. JAA’s duty was simply to check matters within the skill and knowledge of a competent consulting civil and structural engineer, such as arithmetic, the input data and that the output data satisfied the specification requirements (although it was held that, in the circumstances, there was no effective specification for settlement).

Comment

This was a complex, high value, litigation that occupies 98 pages of judgment. The decision raises some interesting, and fundamental, questions about the appropriate scope of duty for a reasonably competent professional and their interaction with other disciplines.

5 The court has made it clear that an engineer is unable to escape from its responsibilities simply by taking advice from a specialist on matters beyond their reasonable competence but, their duty may be discharged by taking such advice if, considering all of the circumstances, they behaved reasonably in doing so. Note, however, that CWS are pursuing an appeal.

James Reid Solicitor-Advocate, BLM London

The RIBA suite of agreements 2010

No sooner had we got acclimatised to the 2007 version of the RIBA suite of appointments another suite arrives to replace them.

There was much criticism of the 2007 suite from a number of quarters not least the Association of Consulting Architects but with the arrival of the 2010 suite peace has broken out. As the Architects’ Journal reported in June of this year, ACE president Brian Waters is quoted as saying:

This is a much improved form of agreement and we are pleased to have been able to help the RIBA bring it about.

From a purely administrative standpoint the number of separate schedules has been reduced from five to two. The suite comprises:

. The Standard Conditions of Appointment. . The Concise Conditions of Appointment. . The Conditions of Appointment for an Architect for a Domestic Project. . Standard Conditions of Appointment of a Consultant. . Sub-consultants’ Agreement 2010. . Electronic only components.

The last item comprises specific schedules such as access consultancy services and third party right schedules together with draft warranties, various guides such as a guide to working with the architect, repair and alteration of historic buildings.

Lastly there is an RIBA guide to the agreements of some 80 pages.

The concise agreement is described as being used for a business or a consumer client ‘where the concise contract terms are compatible with the complexity of the project’. It is envisaged being used with a JCT intermediate form of building contract or a minor works form.

The domestic agreement, as its name suggests is for domestic clients where the contract terms are ‘compatible with the complexity of the project’, so clearly it is not for use on multi-million pound refurbishments of Grade I/II listed mansions!

The guide goes into detail about how the terms of the domestic appointment are to be negotiated. It incorporates advice about which terms have to be individually negotiated and which are potentially unfair and potentially not binding on a consumer.

In deference to consumers there is no net contribution clause in the domestic form, and adjudication (using the RIBA scheme for consumer contracts) can only be invoked by the client.

The main changes that have been made in this suite which have rendered it much more acceptable to a wide range of architects are:

. Exclusion of the right to set-off against sums otherwise due to the consultant and architect, in effect reinstating the clause that appeared in the SFA99.

6 . The right of the architect as well as the client to terminate for any reason on reasonable notice, which had been removed in the 2007 version. . The linking of a cap on liability directly to the level of professional indemnity cover. . The reinstatement of interest at 8% over base on unpaid fees, up from 5% in the 2007 suite. . The recovery of the architect’s costs when pursuing outstanding fees, which had been removed in the 2007 version, together with the reinstatement of the ability of the adjudicator to award parties their costs in an adjudication.

It has to be recognised that these amendments have rendered the suite much more advantageous to architects, at least when dealing with business clients. For domestic clients, who are not separately advised, changes have been made to incorporate recent consumer legislation, such as the Cancelation of contracts made in the Consumers Home or Place of Work Regulations 2008. The guide as mentioned provides valuable advice as to how appointments should be completed especially with consumer clients. It should prove a popular buy at least with architects and other consultants.

Robert Stevenson Partner, BLM London

Correcting fundamental mistakes made in adjudication

In October’s Construction review we considered the scope of the ‘slip rule’, which allows adjudicators to correct straightforward and unintended errors. What if you believe the adjudicator has simply got it wrong?

An adjudicator’s decision cannot be appealed. It is temporarily binding pending a final determination and in the meantime will be enforced even if it is wrong in fact and/or in law, subject only to defences on grounds of an excess of jurisdiction or breach of natural justice. However, the courts have on occasions shown a willingness to make a final determination on discrete points, with the effect that the decision (or part of it) become superseded before it can be enforced.

This can be achieved by issuing a ‘Part 8 claim’ for a declaration on the point(s) in question and asking that the claim be heard at the same time as the application for summary judgment to enforce the adjudicator’s decision.

This is illustrated by the following cases:

. Jarvis Facilities Limited v Alstom Signalling Limited [2004] EWHC 1285, in which the court granted (amongst others) a declaration that the adjudicator was wrong in his interpretation of the contractual payment mechanisms, which led to him awarding Jarvis the amount claimed in its application for payment. However, the court stopped short of deciding what sum was due to Jarvis since it did not have the material required to do so.

. Walter Lilly Co Limited v DMW Developments Limited [2008] EWHC 3139 (TCC), an adjudicator decided that the fading of veneers supplied and fitted by Walter Lilly had been caused by natural light in ordinary use and that that constituted a breach of contract. Walter Lilly issued proceedings under Part 8 and obtained two declarations, including one that:

If the only cause of the fading was natural light (as found by the adjudicator) then such condition, on its own, could not render the claimant in breach of contract.

. Geoffrey Osborne Limited v Atkins Rail Limited [2010] BLR 363, which concerned a dispute over an interim valuation. Geoffrey Osborne asked the court to determine the

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… reach a final decision on a question decided by the adjudicator, provided of course that it is a question that does not involve any substantial dispute of fact and is one that I can finally determine on the material before me … the court must be in a position to answer whatever question is under consideration, [but] I can see no reason why the court has to adopt an all or nothing approach to the decision. If there is part of an adjudicator’s decision that can be isolated and determined by the court, then it seems to me that, if the court considers that it would be just and expedient for the court to do.

. However, in Pilon Limited v Breyer Group plc [2010] EWHC 837 (TCC) the court declined to grant a declaration for Pilon:

The present case is far from being on all fours with [Geoffrey] Osborne. For a start, whilst that case involved an agreed error, this case does not. On the contrary, the point on which this purported declaration is now sought, namely that a payment or withholding notice was in fact necessary under the contract, is the subject of heated debate. Secondly, as Edwards−Stuart J pointed out in his judgment in Osborne, it was only open to the court to grant a declaration because there was no arbitration clause …

In addition, it was actually Pilon who was seeking to enforce (the other parts of) the adjudicator’s decision.

The key points arising from these cases are:

1 The question cannot involve a substantial dispute of fact. 2 The question must be capable of being determined by the court on the material available – it is not enough that the court can say the adjudicator got it wrong, it must be able to establish the right answer. The question may have to be framed in narrow terms to achieve this. 3 Not all questions of contractual interpretation will be suitable for determination under the Part 8 procedure, although the judge’s remarks in Pilon v Breyer should not be taken to mean that questions over the interpretation of payment mechanisms (and the need for payment/withholding notices) will never be suitable. The decision in Jarvis v Alstom shows that they may be. 4 The question need not supersede the adjudicator’s decision in its entirety. 5 The party seeking to enforce the decision cannot at the same time seek to overturn part(s) of it under Part 8. 6 If the forum for final determination of disputes under the contract is arbitration, the unsuccessful party cannot seek such a determination from the court under Part 8, unless the other party agrees.

Comment

Parties who are unsuccessful in adjudication may wish to consider a Part 8 claim, if there are discrete issues of law/contractual interpretation or the adjudicator has made an obvious mistake, which has not been corrected under the ‘slip rule’ but could easily be corrected by the court. Valuation and other fact specific disputes are unlikely to be suitable.

Part 8 claims in this context are relatively scarce but the courts have indicated that they believe adjudication is better served by having this safety release valve to avoid injustice than not. Some arbitrators have expressed the view that they would be prepared to deal with such claims in a

8 similar way and in a short time frame, although the contractual requirements for initiating an arbitration would first have to be observed.

Peter Stockill Associate, BLM London

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